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WHITE PAPER 2019 An overview of the Swiss specialized impact investment fund managers’ contribution to SDG financing SWISS MICROFINANCE & IMPACT INVESTMENTS REPORT
WHITE PAPER2019
An overview of the Swiss specialized impact investment fund managers’ contribution to SDG financing
SWISS MICROFINANCE & IMPACT INVESTMENTSREPORT
Legal Disclaimer The research contained in this paper is meant to broaden and deepen the understanding of the impact investment industry among investors and practitioners. In some instances, it refers to specific collective investment schemes. Such references are made for research purposes only and are not intended as a solicitation or recommendation to buy or sell any specific investment instruments. Similarly, the information and opinions expressed in the text were obtained from sources believed to be reliable in good faith, reflecting the view of the authors on the state of the industry, but no representation or warranty, expressed or implied, is made as to its accuracy or completeness. It is also meant for distribution only under such circumstances as may be permitted by applicable law.
01.1219
This paper was co-written by Brendan Mackinnon, Marina Parashkevova Holmegaard, Ramkumar Narayanan and Roland Dominicé. A special thanks to David Grimaud, Emmanuelle Javoy, Yannis Berthouzoz and Mariano Larena for their review and market expertise insights. The publication was proofread by Danielle Carpenter and designed by James Atkins Design Limited and Pierre Weber.
C O N T E N T S
FOREWORD 3 EXECUTIVE SUMMARY 4
1. DEVELOPMENT FINANCE TAXONOMY 7
2. SWISS IMPACT INVESTING MARKET 15 2.1 Market Size 15 2.2 Profile of Swiss Specialized Impact Investment Fund Managers 17 2.3 Key Data on Swiss Impact Investment Products 19
3. MICROFINANCE: THE PRIME IMPACT SECTOR 23 3.1 Assets 23 3.2 Microfinance Portfolio 25 3.3 Microfinance Debt Portfolio 31 3.4 Investor Typology 34 3.5 Costs & Returns 35 3.6 Social Performance & SDGs 36
4. OUTLOOK 38
5. APPENDICES 39 Acronyms 39 Index of Figures 39 Index of Tables 40
SWISS MICROFINANCE & IMPACT INVESTMENTS REPORT
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Symbiotics and the State Secretariat for Economic Affairs (SECO) wish, by co-sponsoring this report, to present an overview of the Swiss microfinance and impact investing fund managers, and more generally to promote the practice of private sector development finance in Switzerland.
F O R E W O R D
We believe microfinance and impact investing funds serve as an important channel to contribute to the financing of the Sustainable Development Goals (SDGs). The acceleration of private sector development finance investments brought about by this new paradigm is helping to connect such specialized funds and fund managers to mainstream wealth management practice, and align the SDGs with the necessary means to mobilize private sector capital to finance them. This mobilization is a tremendous opportunity to bridge the financing gap for the SDGs, as Official Development Assistance cannot do it alone.
The data sets behind this report stem from the survey and research work Symbiotics has been performing in the past decade, namely the Microfinance Investment Vehicle (MIV) Surveys starting in 2007 for the Consultative Group to Assist the Poor (CGAP) hosted at the World Bank, and the Private Debt Impact Fund (PDIF) Surveys starting in 2016 for the Global Impact Investing Network (GIIN). This report is the third edition of a Swiss subsection of such research, with the first edition dating from 2011 co-sponsored by the Swiss Agency for Development and Cooperation (SDC), and the second dating from 2015 co-sponsored with the University of Zurich. We hope this third edition will further our goal to shed light on the growth, variety and depth of our sector.
This paper also aims to clarify for a wider audience the specificities of private sector development finance, and the difference between sustainable finance, inclusive finance and impact investing approaches, all inscribed in their investment philosophy. In particular on the latter, it tries to map SDGs to sub-segments of investment strategies furthered by such funds.
Ultimately, we hope this report will help promote private finance for the SDGs in developing countries, to support the sector at home and abroad, to position Switzerland as a leading financial center for SDG financing, as well as to help impact investors align their pension contributions and personal savings to their values and aspirations.
Roland Dominicé Liliana de Sá Kirchknopf CEO, Symbiotics Head Private Sector Development, SECO
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E X E C U T I V E S U M M A RY
IMPACT INVESTMENTS› Global market share: With USD 9.3 billion invested in diverse impact
investing themes, Swiss specialized impact investment fund managers have a leading role in the global impact investing space as they manage or advise one third (32%) of global for-profit fund managers’ capital in emerging markets.
› Top 3: Out of the 10 fund managers active as of December 2018, six have headquarters in Geneva, two in Zurich, one in Bern and one in Zug. In terms of assets under management (AUM), BlueOrchard, responsAbility and Symbiotics remain the top 3 leading Swiss fund managers, managing or advising the bulk of impact investing assets (86%).
› Growth: Impact AUM managed by Swiss fund managers has quadrupled since 2010 and registered an 18.5% compound annual growth rate (CAGR).
› Number of products (see Table 1): If many products today remain focused on microfinance, the number of those focused on energy, agriculture and SMEs has nearly doubled since 2014 and new ones have emerged in topics such as health care, fintech and climate.
› Primary investment sectors: Historically, microfinance has been and remains, despite a declining trend, the main investment sector (73.5%). The three specific impact themes attracting the highest funding volume beyond microfinance are energy and climate (7.4% in terms of volume), agriculture (5%) and SMEs (2.7%). Multi-sector products, with a diversified portfolio across several themes, also represent an important strategy for Swiss fund managers in terms of volumes (10.9%).
› Type of investees: Most impact products invest through financial institutions. However, with the rise of private equity funds, the number of investment products focusing their investment strategy on direct investments, i.e., investments in project and corporate finance, has quadrupled since 2010.
› Investment products mapping to the SDGs: Based on the impact themes targeted within their investment products, Swiss fund managers contribute to Sustainable Development Goals 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15.
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Table 1 Swiss Impact Investment Products1
Swiss impact investment managers & product names
Product type
Asset class
Inception date
Incorporation place
Impact investment sector
Investee profile
AlphaMundiSocialAlpha Investment Fund – Bastion Investment fund Mixed 2009 Luxembourg SME Direct investmentsBamboo Capital PartnersBamboo Financial Inclusion Fund Investment fund Private Equity 2007 Luxembourg Microfinance Financial institutionsOasis Fund Investment fund Private Equity 2007 Luxembourg Multi-sector Direct investmentsBamboo Financial Inclusion Fund II Investment fund Private Equity 2015 Luxembourg Microfinance Financial institutionsBamboo Energy Access Multiplier Investment fund Private Equity 2017 Luxembourg Energy Direct investmentsAgri-Business Capital Fund Investment fund Private Equity 2018 Luxembourg Agriculture Direct investmentsBamboo Healthcare Access Fund Investment fund Private Equity 2018 Luxembourg Healthcare Direct investmentsBamboo UNCDF Impact for the Least Developed Countries Fund Investment fund Private Equity 2018 Luxembourg SME MixedBlueOrchardBlueOrchard Microfinance Fund Investment fund Private Debt 1998 Luxembourg Microfinance Financial institutionsEnabling Microfinance Fund Investment fund Private Debt 2008 Liechtenstein Microfinance Financial institutionsMicrofinance Initiative for Asia Debt Fund Investment fund Private Debt 2012 Luxembourg Microfinance Financial institutionsRegional Education Finance Fund for Africa Investment fund Private Debt 2012 Luxembourg Education Financial institutionsInsuresilience Investment Fund Investment fund Mixed 2015 Luxembourg Climate Financial institutionsJapan ASEAN Women Empowerment Fund Investment fund Private Debt 2016 Luxembourg Microfinance Financial institutionsBlueOrchard/responsAbility/SymbioticsMicrofinance Enhancement Facility Investment fund Private Debt 2009 Luxembourg Microfinance Financial institutionsImpact FinanceImpact Finance Fund Investment fund Private Debt 2011 Luxembourg Agriculture Direct investmentsINOKS CapitalCommodity Value Chain Sustainable Investment Fund Investment fund Private Debt 2014 Luxembourg Agriculture Direct investmentsObviamSwiss Investment Fund for Emerging Markets Investment fund Mixed 2005 Switzerland Multi-sector FundsImpact Investing SME Focus Fund Investment fund Private Equity 2013 Switzerland SME FundsPG Impact InvestmentsPG Impact Investments I Investment fund Mixed 2018 Guernsey Multi-sector MixedPhileaPhilea Cooperative Private Debt 1996 Switzerland Microfinance Financial institutionsresponsAbilityresponsAbility Micro and SME Finance Fund Investment fund Private Debt 2003 Luxembourg Microfinance Financial institutionsresponsAbility Micro and SME Finance Leaders Investment fund Mixed 2006 Luxembourg Microfinance Financial institutionsresponsAbility BOP Investments Investment fund Private Equity 2007 Luxembourg SME FundsresponsAbility Micro and SME Finance Debt Fund Investment fund Private Debt 2007 Luxembourg Microfinance Financial institutionsresponsAbility Ventures I Investment fund Mixed 2010 Switzerland SME Direct investmentsGlobal Climate Partnership Fund Investment fund Private Debt 2011 Luxembourg Energy Financial institutionsresponsAbility Fair Agriculture Fund Investment fund Private Debt 2011 Switzerland Agriculture Direct investmentsresponsAbility Financial Inclusion Fund Investment fund Private Debt 2011 Luxembourg Microfinance Financial institutionsresponsAbility Participations Investment fund Private Equity 2012 Switzerland Microfinance Financial institutionsresponsAbility Renewable Energy Holding Investment fund Private Equity 2013 Mauritius Energy Direct investmentsresponsAbility Energy Acces Fund Investment fund Private Debt 2015 Luxembourg Energy Direct investmentsresponsAbility Agriculture I Investment fund Private Equity 2017 Luxembourg Agriculture Direct investmentsresponsAbility Agriculture Fund Investment fund Private Debt 2018 Luxembourg Agriculture Direct investmentsSymbioticsDual Return Fund – Vision Microfinance Investment fund Private Debt 2005 Luxembourg Microfinance Financial institutionsFinethic Microfinance Investment fund Private Debt 2006 Luxembourg Microfinance Financial institutionsDual Return Fund – Vision Microfinance Local Currency Investment fund Private Debt 2010 Luxembourg Microfinance Financial institutionsRegional MSME Investment Fund for Sub-Saharan Africa Investment fund Private Debt 2010 Luxembourg Microfinance Financial institutionsGlobal Microfinance Fund Investment fund Private Debt 2013 Luxembourg Microfinance Financial institutionsSEB Microfinance Fund II Investment fund Private Debt 2014 Luxembourg Microfinance Financial institutionsSEB Microfinance Fund III Investment fund Private Debt 2015 Luxembourg Microfinance Financial institutionsEmerging Impact Bond Fund Investment fund Private Debt 2015 Luxembourg Microfinance Financial institutionsFinethic Microfinance II Investment fund Private Debt 2016 Luxembourg SME Financial institutionsSME Finance Loans for Growth Investment fund Private Debt 2016 Luxembourg SME Financial institutionsSEB Microfinance Fund IV Investment fund Private Debt 2016 Luxembourg Microfinance Financial institutionsGlobal Financial Inclusion Fund Investment fund Private Debt 2016 Luxembourg Microfinance Financial institutionsSEB Microfinance Fund V Investment fund Private Debt 2017 Luxembourg Microfinance Financial institutionsSEB Microfinance Life Investment fund Private Debt 2017 Luxembourg Microfinance Financial institutionsSEB Impact Opportunity Fund Investment fund Private Debt 2018 Luxembourg Multi-sector MixedSEB Microfinance Fund VI Investment fund Private Debt 2018 Luxembourg Microfinance Financial institutions
1 Active as of 31.12.2018
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MICROFINANCE INVESTMENTS› Asset size: The total assets of Swiss microfinance investment funds
increased from USD 4.1 billion to USD 6.8 billion in 4 years (CAGR: 14%), maintaining a significant share of the global microfinance investment vehicle (MIV) market at 41% on average over the years.
› Asset managers: BlueOrchard, responsAbility and Symbiotics remain the top 3 fund managers, accounting for 99% of all Swiss microfinance AUM.
› Geographical allocation: Latin America and the Caribbean continue to attract the highest funding volumes (37%), followed by Eastern Europe and Central Asia (20%), East Asia and Pacific (17%), South Asia (16%), sub-Saharan Africa (8%) and MENA (2%).
› Investees: Swiss MIVs have increased their exposure to larger investees (i.e., those with a balance sheet above USD 100 million) since 2014, from 58% to 78% as of December 2018, showing an up-market move towards financing larger financial institutions that generally have broader financial products and greater diversity in their client-base.
› Type of investors: Throughout the years, Swiss fund managers have mostly leveraged institutional capital (29% CAGR), signaling rising interest among banks, pension funds, foundations and insurers willing to access the real economy while contributing to growth and prosperity in emerging and frontier markets.
› Local currency debt investments: Since 2014, Swiss MIVs have grown their share of local currency investments from 32 to 50% of the debt microfinance portfolio.
› Costs: Swiss MIV management fees have been stable at around 1.5% of total assets under management over the period, with other operating expenses at about 0.4%. Thanks to their relatively large fund size, they benefit from economies of scale and a lower total expense ratio than their foreign microfinance peers.
› Net returns: On average, Swiss MIVs recorded 3% net returns in USD and slightly lower returns in EUR, at 2.4%.
› Social performance: The average number of borrowers by Swiss MIV has significantly increased over the last years. A Swiss MIV today indirectly finances about 540,000 borrowers, whose average credit size amounts to USD 1,800.
› SDG mapping: The most recurring SDGs against which Swiss MIVs map their investment portfolios are, among others, Goal 1: No Poverty, Goal 8: Decent Work and Economic Growth, Goal 5: Gender Equality, and Goal 10: Reduced Inequalities.
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1.D E V E LO P M E N T F I N A N C E TAXO N O M Y
A. Micro-credit, microfinance, inclusive finance, impact investing, SDG financing: is it all the same thing? In the development aid and policy space, multilateral banks initiated the microfinance movement in the 1980s as an alternative to the massive government indebtedness programs in the South following the decolonization era of the 1960s. It was seen as a bottom-up private sector solution meant to complement, or maybe one day replace, top-down public aid while essentially finding ways to service the needs of low-income households and their livelihoods in high population growth countries that were both underdeveloped and underserved. The value chain has remained unchanged since then but has evolved quite a bit in its underlying framework, which can sometimes be confusing for the outside observer.
The narrative has moved from an initial focus on microcredit in the 1990s – a small loan to a poor individual engaged in small income generating activities with little or no collateral to offer, and usually jointly bound to self-selected peers to raise its credit profile – to microfinance by the time the United Nations celebrated the industry in 2005. The focus had then moved to bankers – successful microfinance institutions that enable small loans and, increasingly, savings, insurance and payment systems of all kinds. After the first micro-bank IPOs in India and Mexico, policy-makers shifted to a more systemic discourse of building inclusive financial systems. When the global financial crisis hit, the underlying framework evolved again, towards outcome or impact. While industry experts eventually settled into using the term impact investing, it remains a somewhat abstract idea to everyday savers and pensioners. More recently, the model has increasingly been talked about using the lens of the United Nations Sustainable Development Goals (SDGs).
Microcredit, microfinance, inclusive finance, impact investing and SDG financing are to a certain extent all the same thing: reaching far into the base of the social pyramid (BOP) in developing markets, into micro, small and medium enterprises and low- and middle-income households. From a focus on a more emotional narrative of a poor household or microentrepreneur to a more institution-building financial success story or taking an economist’s systemic approach to capital flows and the need for them to be inclusive; or focusing on measuring results and their outcomes; or eventually telling how money is put to work, which goods and services of first necessity they fulfill. They try to address the same aspiration, just using different lenses.
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B. Defining the investment universe and value chainThe investment universe – and the value chain it entails – of private sector development finance funds is straightforward, irrespective of the lens chosen: investors investing through a range of investment products, themselves focusing solely on emerging and frontier markets, with a view to reaching the base of the population, either indirectly through financial intermediaries or directly through small businesses, or in some cases through larger corporations or projects.
› Investors: Any capital accumulation scheme, whether through collective pension contributions, insurance plans, or directly through savings from private or retail banking accounts, or through more sophisticated foundations or other wealth management vehicles, but driven by a double bottom line approach of sound financial return and positive development impact.
› Investment funds: Any type of collective investment scheme and vehicles, either dedicated or specialized, or more generic partially targeting development finance.
› Emerging and frontier markets: In the sense of targeting primarily upper middle, lower middle and low-income countries, as defined by the World Bank.
› Financial intermediaries: Any type of financial institutions (banks, non-bank financial institutions, cooperatives, leasing schemes, insurance plans, etc.) or local intermediary (vehicles, funds, etc.), addressing the base of the pyramid.
› Micro-, small and medium enterprises (MSMEs): Small businesses that employ respectively up to 5 employees, between 5 and 50 employees, and between 50 and 250 employees.
› Corporations: Any larger companies addressing the base of the pyramid.› Projects: Any project finance addressing the base of the pyramid.› Low- and middle-income households (LMIHs): Households with a net
disposable income that is average or below average, ranging from extremely poor to moderately poor and vulnerable non-poor levels, as defined by the World Bank.
› Base of the pyramid (BOP): Low and middle-income households and MSMEs in underserved economies.
INVESTORS
INVESTMENT FUNDS
EMERGING AND FRONTIER MARKETS
LOW- AND MIDDLE- INCOME HOUSEHOLDS
FINANCIAL INTERMEDIARIES
SMALL BUSINESS
CORPORATIONS PROJECTS
Figure 1Investment Value Chain
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C. Defining the development narrative and approachPrivate sector development finance has emerged in the wake of development finance institutions, multilateral development banks and more general public sector financing of private sector business with a development impact purpose. Its practice can be defined as offering private debt and private equity investments into the real economy in emerging and frontier markets, with a view to creating both sound financial return and positive sustainable development impact. It includes topics such as microfinance, small business finance, sustainable agriculture, community development (affordable housing, sustainable infrastructure, clean utilities, etc.), renewable energy (hydro, solar, waste, wind, etc.), affordable healthcare and education, etc.
Specialized asset managers and dedicated investment funds represent private sector development finance. They stand out, by seeking to pursue an investment philosophy geared towards sustainable, inclusive and impact finance in emerging and frontier markets. This more complex approach and narrative for the investor, entails a triple promise or commitment, alongside the other risk, return, regulatory and cost elements that build their practice.
› Sustainable finance: In the sense of following environmental, social and governance (ESG) principles, as illustrated by the principles for responsible investing (PRI).
› Impact investing: In the sense of positively addressing a range of global challenges, as currently illustrated by the SDGs (i.e., no poverty, zero hunger, good health and well-being, quality education, gender equality, clean water and sanitation, affordable and clean energy, decent work and economic growth, etc.).
› Inclusive finance: In the sense of following an investment strategy that serves the base of the pyramid, investing with a view to create inclusive growth for the benefit of low and middle-income households and MSMEs.
Development finance, at least as practiced in the private sector, is part of the wider sustainable finance space as it seeks to contribute to a sustainable and prosperous economy in emerging and frontier markets. In the same vein, it is part of impact investing in its wider definition. And inclusive finance is part of what it tries to achieve. If that image is true from a market size and investment universe perspective, from an investment approach and methodology perspective, sustainable finance, impact investing and inclusive finance are different approaches or lenses to a same overarching goal – that of achieving a sustainable and prosperous economy focusing on (a) integrating and engaging on social, environmental and good governance
DEVELOPMENTFINANCE
SUSTAINABLEFINANCE
(ESG)
IMPACT INVESTING
(SDG)
INCLUSIVE FINANCE
(BOP)
Figure 2Investment Approach and Methodology
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practice, (b) targeting specific themes or SDGs and monitoring and measuring their implementation and outcome, or (c) focusing on the base of the pyramid population and measuring the breadth and depth of outreach through access to finance and goods and services of first necessity for low- and middle-income households in emerging and frontier markets.
As a result, development finance investments stand out from mainstream investments because they integrate these filters and drivers in their decision-making process, added value and monitoring work. They typically implement their development narrative and theories of change through upstream stated intent, transactional engagements and downstream measurement centered on either the social or environmental objectives they seek to achieve.
This includes a range of tools, policies and procedures, such as: (1) pre-investment ratings and evaluations, typically centered on sustainable finance principles (environmental, social and governance – ESG); (2) transactional covenants or engagements, binding or furthering the use of funds to the targeted goals and intent of their investments, typically using a range of impact topics or SDGs; and (3) post-investment reporting on (a) the investment output produced in terms of volumes, risk and return, (b) the investment outreach achieved, measuring inclusion in terms of breadth and depth into populations at the base of the pyramid and, in some cases, (c) on the ex-post outcome results delivered attached to their specific stated intent, which today can use the subset indicators underlying each SDG to produce effective impact measurement.
Figure 3Investment Universe
INCLUSIVEFINANCE
DEVELOPMENTFINANCE
IMPACT INVESTING
SUSTAINABLEFINANCE
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D. Mapping the SDGs to specific investment strategiesPrivate sector development finance investment funds overwhelmingly started with microfinance strategies. They eventually grew with new small business finance strategies. More recently a growing number of funds offer tailored thematic investment strategies, either through local financial institutions and intermediaries, or directly into small businesses or larger projects and corporations, grouped into food and agriculture, community development, climate and energy, health care or education investment strategies.
1. Microfinance, addressing household consumption and financial securityMicrofinance refers to the provision of and access to financial services (mainly credit, savings, insurance and payments) at the base of the pyramid in underserved economies. It primarily addresses a household finance need, either in terms of financial security (credit lines, savings, insurance, payments), or in terms of household consumption (loans and targeted savings programs). It also contributes to financing small household income streams (working capital loans for small entrepreneurial or employment activities). They distinguish themselves by offering capital, that is generally not formally secured or collateralized, in very small amounts, starting at around USD 100 to USD 1,000 and up to a maximum of USD 10,000 in certain countries, and going as deep as a couple dollars for some mobile fintech solutions. Most microfinance institutions or banks offering microfinance services try to cater for all financial needs of their target clientele, with a multi-sector or sector agnostic approach. Some nevertheless target a specific theme, market or product such as energy finance (e.g. off-grid home solar panel leasing), housing finance (e.g. small loans for home refurbishments) or education finance (e.g. student loan facilities), etc.
Investments in microfinance take place primarily through three types of counterparties:› Microfinance institutions, or MFIs (whether banks, non-bank financial
institutions, credit and savings cooperatives or non-profit / non-governmental organizations) designated as first tier (above a total loan book of USD 100 million), second tier (between USD 10-100 million) or third tier (below USD 10 million) institutions.
› Commercial banks orienting part or all of their services to the base of the pyramid, targeting either in full with a majority of such target clients, or through portfolio carve-outs or use of funds, specifically targeting such client segments.
› Fintechs (financial technology companies), targeting base of the pyramid clientele through technology solutions, mobile operators, online
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applications and other software enabling the delivery of microfinance services.
Microfinance models primarily address SDG 1 (No Poverty), 5 (Gender Equality) and 10 (Reduced Inequalities). They tend to focus on the poorest categories of clients, are positively biased towards women, and intend by design to reduce income, consumption and access to finance gaps. They can nevertheless also be looked at through the lens of other specific goals.
2. Small business finance, addressing employment and entrepreneurshipSmall business finance refers to the financing of small and medium enterprises, which are broadly defined as employing respectively 5 to 50 and 50 to 250 employees.2 Small business finance, as with microfinance, can be sector agnostic, adopt a diversified multi-sector approach or work through specialized intermediaries targeting a specific theme, clientele, market or product, such as: agricultural finance (e.g., loans for food producers), energy finance (e.g., rooftop solar business solutions), transportation finance (e.g., electric vehicle leasing for taxi drivers), etc. Small business finance nevertheless differs from microfinance by the nature of its counterparts, larger financing sizes, usually longer maturities, and credit methodologies that rely more on collateral and security agreements than on unsecured and informal guarantee schemes. In addition, small business finance tends to be more exposed to macro-economic dynamics, thus more correlated to the general economy and somewhat less resilient to financial market volatility, even if more secure as more formalized.
Investments in small business finance take place primarily through three types of counterparts:› SME banks, which have a majority of clients and assets focusing on
small and medium enterprises.› Specialized financial institutions, regardless of their legal status and
registration setup, working off their own balance sheet or as originators and servicers for others, focused by design on small businesses, whether through lending, leasing, factoring, insurance or other financing mechanisms.
› Investment funds and vehicles, whether local, regional or global, focusing on investments into small and medium enterprises, in target markets, either using debt or equity instruments.
2 The European Union defines a small enterprise as less than 50 employees, EUR 10 million in turnover or assets, and a medium enterprise as less than 250 employees, EUR 50 million in turnover or assets. Financing of SMEs might vary widely in size, from for instance EUR 10,000 to 10 million. These metrics might differ significantly in emerging or frontier markets.
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Small business finance models primarily address SDG 8 (Decent Work and Economic Growth) and SDG 12 (Responsible Consumption and Production). Small business finance is principally about employment and entrepreneurship as vehicles of growth and economic development. As they typically represent the vast majority of formalized companies and the largest share of employment and contributions to GDP, they are also a very valuable means to address new normative developments in responsibly producing and consuming the goods and services put forth to the public.
3. Thematic investment strategiesImpact investments can also be channeled directly to projects or corporations, without going through a local financing intermediary, generally on a stand-alone basis, typically using larger investment volumes and longer transaction maturities. By nature, such investments do not necessarily benefit from a diversified pool of similar investments and may use a blend or range of instruments and structures that expose the investor to higher risk and return profiles. Investments in projects and companies can nevertheless cater more directly for certain specific goals covering a number of activities, segments and topics.
New impact investment strategies and funds typically include:› Food & agriculture. Agricultural value chain financing, whether
production, trade, distribution or other models, focus on businesses that increasingly adopt a sustainable approach to the extraction and harvesting of natural products from the planet, whether crops, cattle, fisheries or other plants and animals. With a sustainability intentionality attached to it, the businesses engaged in these sectors address SDG 2 (Zero Hunger), 14 (Life below Water) and 15 (Life on Land).
› Community development. Community development financing involves housing, utilities and infrastructure investments, and the industries that develop, support and construct them, with a bias towards sustainable innovation to, for instance, provide green buildings, clean energy, transportation or water systems that are accessible to and affordable for populations at the base of the pyramid, also integrating a particular emphasis on rapid urbanization and congestion on the one hand and rural exodus and scarcity of services on the other. This investment segment best addresses SDG 6 (Clean Water and Sanitation), 9 (Industry, Innovation and Infrastructure) and 11 (Sustainable Cities and Communities).
› Climate & energy. Energy financing with a sustainable bias will include strategies to reduce energy use and save energy in a more efficient manner and/or use renewable energy and clean technologies for alternative production and consumption schemes, or a combination of
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both. They include a range of taxonomy, which includes hydro, solar, wind and waste. This category can extend to forestry, land use and conservation, as well as insurance schemes to, for instance, address climate preservation. Overall, the multiplicity of models and businesses in this segment best address SDG 7 (Affordable and Clean Energy) and 13 (Climate Action).
› Health & education. Financing hospitals and clinics, health care plans, services and insurance, and the production and distribution of health products contribute to SDG 3 (Good Health and Well-being). Providing student and school loans or financing innovative digital learning solutions or, more generally, knowledge transfer and management contribute to SDG 4 (Quality Education).
Figure 4SDG Mapping of Investment Strategies
COMMUNITY DEVELOPMENT
SMALL BUSINESS FINANCE
FOOD & AGRICULTURE
CLIMATE & ENERGY
HEALTH & EDUCATION
MICROFINANCE
DEVELOPMENTFINANCE
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2. S W I S S I M PA CT I N V E S T I N G M A R K E T
2.1 MARKET SIZEThe Global Impact Investing Network’s (GIIN) Annual Impact Investor Survey estimated that the market size for impact investing was USD 131 billion at the end of 2018, of which USD 61 billion were exclusively allocated to emerging markets.3 When looking into assets under management (AUM) by type of organization, for-profit fund managers manage or advise the majority of investments in emerging markets, i.e., USD 29 billion (48%, Table 2).4 In terms of geographical representation, 81% of volume management stems from Western, Northern and Southern Europe, 15% from the U.S. and Canada, and the remaining by fund managers headquartered in emerging markets.
Table 2 Global Impact AUM in Emerging Markets
Type of Organization
Global AUM in USD million allocated to emerging markets
(2018)
% of global AUM allocated to emerging markets
(2018)Bank/diversified financial institution 1,550 3%Development finance institutions 18,898 31%Endowment – – Family office 99 0%Foundation 1,402 2%Fund manager: for-profit 29,489 48%Fund manager: not-for-profit 7,112 12%Pension fund 484 1%Permanent investment company 569 1%Other 1,758 3%Total capital allocated to Emerging Markets 61,359 100%
3 Global Impact Investor Network, 2019, The Annual Impact Investor Survey 2019. The market size including three outliers is estimated at USD 239 billion.
4 Estimates for emerging markets by type of organization provided by GIIN.
Note on methodologyThe following sections focus exclusively on Swiss specialized impact investment fund managers, with impact investments as a core focus (more than 50% of total assets under management).
In order to provide the most accurate estimation of their impact investing assets and avoid double counting, the research team aggregated 1) the asset size of their legally independent investment funds under management/advisory as well as 2) investments through managed/advised portfolios. Regarding funds of funds, only the portfolio invested in non-Swiss impact funds was taken into account.
Overall data was collected through publicly available sources while for microfinance products specifically, data was sourced from the annual Symbiotics MIV surveys.*
*The Symbiotics Microfinance Investment Vehicle survey, produced on an annual basis since 2007 and available on syminvest.com, aims to provide comprehensive market trends and peer group analysis on microfinance offshore investments.
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With a combined USD 9.3 billion of assets under management, Swiss specialized impact investment fund managers play a leading role in the global impact investing space as they manage or advise 32% of the global for-profit fund managers’ share of impact investing in emerging markets (Figure 5).
Figure 5Impact Investing Market Size
Since 2010, the Swiss market’s asset size quadrupled, with a compound annual growth rate (CAGR) of 18.5% on a moving sample and 14.7% on a constant sample basis (Figure 6).
Figure 6Swiss Impact Investing Growth
0
2,000
4,000
6,000
8,000
10,000USD million
201820142010
2,390
5,274
9,289
IMPACT INVESTING
USD 131 billion*
SHARE OF SWISS SPECIAL IZED FUND MANAGERS
(32%) USD 9.3 billion
EMERGING MARKET – FOCUSED IMPACT INVESTMENT FUND MANAGERS USD 29.5 billion
S U S TA I N A B L E F I N A N C E
USD 30.7 trillion
F I N A N C I A L I N V E S T I N GUSD 79.2 trillion
* For more information on the total impact investing market size, please see footnote 3 on page 15.
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2.2 PROFILE OF SWISS SPECIALIZED IMPACT INVESTMENT FUND MANAGERSThe ecosystem of Swiss specialized impact investment fund managers has not changed radically over the past decade mainly due to their cost-intensive business models in terms of capital investments and solid headcounts in evaluating and structuring investment opportunities with a social benefit.5
Of the 10 fund managers active as of December 2018, BlueOrchard, responsAbility and Symbiotics are the three largest, managing or advising the bulk of impact investing assets (86% of total Swiss AUM). These three companies have a large track record in the microfinance investment space, which has been their historical core area of focus. Over time, they have developed new impact products, such as SME, agriculture, education, as well as energy and climate funds.
Obviam and Bamboo Capital Partners have their own specialties in terms of investor base and financial instruments: the first one was a spinoff of the Swiss Investment Fund for Emerging Markets (SIFEM) that Obviam took management of in 2010; the second one is specialized in seed and growth funding across several impact sectors, including fintech, energy and healthcare. PG Impact Investments, launched in 2015, is the only newcomer to the field in the last nine years, investing both debt and equity across a multitude of sectors.
5 Symbiotics, 2015, Microfinance Funds: 10 Years of Research & Practice.
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Impact Finance, launched back in 2010, is investing directly in small and medium agribusinesses while INOKS Capital provides capital to commodity value chains. AlphaMundi, founded in 2007, uses a gender lens approach to invest in a diversified portfolio with principal exposure in microfinance, agriculture and energy. Last but not least, Philea, previously Fonds International de Garantie, is a cooperative that provides working capital to agricultural cooperatives (see Table 3 for more information on each Swiss specialized impact investment fund manager).
Table 3 Descriptive Profiles of Swiss Specialized Impact Investment Fund Managers67
OrganizationInception
year Offices Headquarters Staff Impact investment themes
No. of past and present
impact mandates
Disbursed impact investments since inception (USD m)
AlphaMundi 2007 3 Geneva 13 Microfinance, SME, Agriculture, Energy, Education 1 ≈45Bamboo Capital Partners 2007 5 Geneva 41 Microfinance, SME, Fintech, Energy, Healthcare 7 ≈400BlueOrchard 2001 8 Zurich 100 Microfinance, SME, Education, Infrastructure, Climate 14 ≈6000Impact Finance 2010 2 Geneva 16 Agriculture, SME 1 ≈160INOKS Capital 2004 3 Geneva 21 Agriculture, SME 17 ≈207
Obviam 2010 1 Bern 31 Microfinance, SME, Infrastrucutre, Education, Agriculture 3 ≈ 800PG Impact Investments 2015 4 Zug 16 Microfinance, SME, Housing, Energy, Agriculture, Healthcare, Education 1 ≈100Philea 1996 1 Geneva 5 Agriculture, Microfinance 1 ≈50responsAbility 2003 10 Zurich 244 Microfinance, SME, Energy, Agriculture 15 ≈9000Symbiotics 2005 8 Geneva 157 Microfinance, SME 35 ≈5000
6 Data based on respective websites and other public sources of information.7 Although INOKS Capital has launched four funds since its inception, only
one is promoted as an impact investing fund. Across all its mandates, INOKS Capital has disbursed more than USD 3600 million.
19
2.3 KEY DATA ON SWISS IMPACT INVESTMENT PRODUCTSA. Investment sectors At a global level, microfinance investments in emerging countries amount to 23% of impact investments8 (a number that can rise up to 45% when including other financial services, see Figure 7). In the case of Swiss specialized impact investment fund managers, this share lies at 73.5% of their total AUM, with about half of their product offering having a focus on microfinance by the end of 2018 (Figure 8).
This share has, however, been continuously declining in favor of other sectors since 2010. In particular, excluding microfinance investments, the three specific impact themes attracting the highest funding volume are energy and climate (7.4% in terms of volume), agriculture (5%), and SME finance (2.7%). Multi-sector investment products, which most of the time have a diversified portfolio across the above-mentioned themes, with eventually some transactions in other, less mature sectors such as education and health care, still represent an important strategy for specialized Swiss impact investment fund managers in terms of volumes (10.9%).
8 Global Impact Investor Network, 2019, The Annual Impact Investor Survey 2019. The market size estimation excludes outliers
0
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Health & Education
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Food & Agriculture
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Microfinance
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95.8
2010 2014 2018
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6.50.00.00.00.0
0.00.0
2.19.7
77.964.3
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5.54.8
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2.111.9
73.552.7
10.99.1
7.610.9
5.010.9
0.43.6
2.712.7
% volume% number
Figure 7 2018 Asset Allocation by Sector – Emerging Market-Focused Global Investors
Figure 8 Swiss Impact Investment Products by Sector
20
B. Asset classAccording to the GIIN, at a global level (and including investments in developed markets), private debt impact investments account for 39% of assets, far above other instruments such as private equity (18%), public equity (16%) and public debt (12%).9
For Swiss specialized impact investment fund managers, private debt also represents the dominant asset class (Figure 9). An important evolution since 2010 has been the establishment of several equity impact funds, which have tripled in number since 2010. Mixed investment products, which are third in line, mostly invest through a blend of private debt and private equity.
C. Size of investment productsIn terms of size, products that Swiss specialized impact investment fund managers are offering consist of different tiers: large (>USD 250 million in AUM), mid-size (USD 50-250 million) and small (<USD 50 million).
As of December 2018, about half of investment products are of medium size (Figure 10). This is explained both by the growth of previously small funds over the period, as well as the launch of new investment products of this size range.
9 GIIN, 2019, Annual Impact Investor Survey.
Figure 10 Swiss Impact Investment Products by Size
0
8
16
24
32
40
201820142010
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2
19 18
5
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8
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Small fundsMedium fundsLarge funds
Figure 9 Swiss Impact Investment Products by Asset Class
0
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201820142010
Private debtPrivate equityMixedListed equity
4
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0
47
30
14
12
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0
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21
Furthermore, in terms of volumes, whereas in 2010 only two products had AUM of more than USD 250 million, this number has now risen to eight.
D. Investee profile Most of the Swiss products studied channel impact investments through financial institutions (Figure 11). This high share is mostly due to the historical prevalence of microfinance investments in Switzerland and by the fact that financial institutions can also represent a ‘de-risked’ strategy to invest indirectly in themes such as SMEs and energy-efficient projects.
Aligned with the rise of private equity funds, but not only, the number of investment products focusing their investment strategy on direct investments, i.e. investments in project and corporate finance, has quadrupled since 2010.
Figure 12 Swiss Impact Investment Products by Incorporation Place
E. Incorporation placeAlmost all investment fund structures are registered in Luxembourg, with only a few registered in Switzerland (Figure 12). Guernsey, Liechtenstein and Mauritius each represent the domicile for one fund (whereas the Netherlands was also a site in the past for two funds).
Other countries refer to privately managed or advised portfolios for entities based outside of Switzerland, such as foundations.
Figure 11 Swiss Impact Investment Products by Investee Profile
0
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201820142010
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3 20
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5 4
Financial institutionsDirect investmentsFundsMixed
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United StatesNetherlandsMadagascarGuernseySpainMauritiusLiechtensteinSwitzerlandLuxembourg201020142018
00 111 1
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22
43
00 110 1 21 001 1
73
7
13
0
22
F. Inception and closing datesThe first purely commercial product launched by a Swiss specialized impact investment fund manager took place in 199810 (Figure 13) in the form of a microfinance investment vehicle. However, the peak of newly launched impact investment products, mostly microfinance funds, was in 2007, following the United Nations International Year of Microcredit. Interestingly, 2018 was the year with the highest launch of non-microfinance impact products (6 out of 7, compared to 4 out of 9 in 2015, 3 out of 7 in 2012, and 1 out of 7 in 2007), showing that the Swiss impact investing market is evolving towards higher thematic diversification. There is a good balance between open-ended and closed-end funds (55% vs. 45% in terms of number of funds) which respectively results in different liquidity management strategies.
G. Product type Investment funds have historically represented the bulk of investment products in terms of number and volumes. Their share has risen even more since 2010, with the decline of collateralized debt obligations (CDOs) and the constant number of non-governmental organizations (NGOs)/cooperatives categorized as impact investment managers (Figure 14). In addition to investment funds, some Swiss specialized impact investment fund managers operate portfolio accounts on behalf of single investors, e.g., foundations and/or high-net-worth individuals.
10 Philea, previously Fonds International de Garantie, launched in 1996 as a cooperative and not an independent investment fund.
-10 -5 0 5 102027202420232022202120202019201820172016201520142013201220112010200920082007200620052004200319981996
Newly opened productsClosed (and expected to close) products
1111
65
744
955
71
54
733
-1-5
-8-1
-3-3
-2-2
-2-1
-1
-1-2
-1-2
Figure 13 Swiss Impact Investment Products by Inception and Closing Year
Figure 14 Swiss Impact Investment Products by Type
0
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201820142010
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2 1 1
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2 1 0
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FundsManaged/advised portfoliosCooperativesCDOs
23
3.M I C RO F I N A N C E : T H E P R I M E I M PA CT S E CTO R
With a track record of more than 20 years, microfinance remains today the most mature sector within the entire impact investing industry. It benefitted from mainstream exposure in 1998 when the United Nations proclaimed that 2005 would be the International Year of Microcredit, aiming to promote microfinance’s contribution to the Millennium Development Goals. This was already a decade before the terminology impact investing actually saw light.
Building on its international visibility, microfinance attracted a growing amount of private sector investments in the late 1990s, a period when the first commercial microfinance investment vehicles were created. Today, more than 120 MIVs exist in the market, offering an entry point for investing in microfinance for offshore investors, generally through debt and equity capital in microfinance institutions (MFIs) that on-lend to an underserved segment of the population, generally micro, small and medium enterprises (MSMEs) and low-income households based in developing countries.
This chapter looks at the market trends for MIVs associated with Swiss specialized impact investment fund managers.11
3.1 ASSETSA. Swiss market share and growthAs of December 2018, the global MIV market was estimated at USD 16.9 billion12, up from USD 10.4 billion in 2014, implying a CAGR of 13%. Swiss MIVs have kept a stable and significant share of these total assets, at an average of 41% over the years (Figure 15). Their assets increased from USD 4.1 billion to USD 6.8 billion in 4 years (CAGR: 14%).
When looking at market growth on a yearly basis (Figure 16) and based on a constant sample of MIVs year-on-year, Swiss MIVs have witnessed double-digit growth every year except in 2018 (+1.6%). Due to a difficult year in emerging and frontier markets, some of the main fund managers were negatively impacted by capital outflows. This resulted in a flat growth, which was also observed for non-Swiss MIVs (+3.5%).
11 This chapter refers to these MIVs as Swiss MIVs throughout.12 Symbiotics, 2019, MIV Survey.
Figure 16 Yearly Growth of MIV Market
Figure 15Microfinance AUM
-7%
0%
7%
14%
21%
28%
20182017201620152014
15
-6
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32
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1820
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0
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20182017201620152014
Total microfinance AUMSwiss microfinance AUM
USD million
24
B. Largest Swiss playersWhen considering only the Swiss MIV sample, the top three specialized MIV managers are BlueOrchard, responsAbility and Symbiotics (Figure 17), a result aligned with the findings for the impact investment market globally. Together, these three MIV managers account for 99% of all Swiss microfinance AUM as of December 2018, a ratio that grew by 5 percentage points from 2014.
Figure 17 Top 3 Swiss MIV Managers
0
500
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1,500
2,000
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20182017201620152014
responsAbilityBlueOrchardSymbioticsOthers
Microfinance AUM (USD million)
25
3.2 MICROFINANCE PORTFOLIOWith microfinance as their core investment segment, MIV assets are largely comprised of the microfinance portfolio, consistently around the 80% mark since 2014, with liquidities and the ‘other portfolio’ completing asset composition (Figure 18). The ‘other portfolio’ composed generally of investments into the more up-market SME segment (but not only, i.e., energy, agriculture and housing) has grown gradually since 2016 and today accounts for 12% of Swiss MIV assets or 15% of their overall lending portfolio (Figure 19).13
A. Breakdown by investee sizeMIVs in most cases reach-out to MSMEs and low-income households through financial institutions that are located in emerging and frontier markets. Over 95% of the MIV microfinance portfolio is invested through these financial institutions, the rest being allocated through other means like investment funds or microfinance holdings in some cases.
The financial institutions financed by MIVs vary in size. Some of them are small, with total assets below USD 10 million equivalent, while others are bigger, at over USD 100 million in total assets. Looking at the breakdown of MIV microfinance portfolios within these financial institutions shows that Swiss MIVs have increased their exposure to larger investees (i.e., those with a balance sheet above USD 100 million) since 2014, from 58% to 78%
13 Variation and growth are partially due to changes in reporting methodologies.
Figure 18 MIV Asset Structure
0%
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20182017201620152014
84 83 79 80 80
12 12 14 10 53 2 4 7 12
2 3 3 3 4
Other assetsLiquiditiesOther portfolioMicrofinance portfolio
% of total assets
Figure 19 MIVs’ Other Portfolio
0
160
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20182017201620152014
HousingEnergyAgricultureOther activities (incl. SMEs)
USD million
26
as of December 2018 (Figure 20). This shows an up-market move towards financing larger financial institutions that generally have a broader range of financial products and more diversity in their client base. In comparison, non-Swiss MIVs have a more balanced exposure in terms of investee size, with 56% and 40% respectively in large and medium financial institutions today.
B. Investment InstrumentsThe portfolio in financial institutions is, for Swiss MIVs, almost exclusively (95% on average) structured through private debt transactions (Figure 21). MIV managers from other countries also rely principally on this asset class, albeit at a lower level with a substantially higher fraction of their microfinance portfolio (24% on average) in private equity (Figure 22).
C. Regional trendsSwiss MIVs display a good mix of investments in emerging and frontier markets. Latin America and the Caribbean (LAC) has historically been a prime region of focus for Swiss MIVs. Today, it continues to attract the highest volumes of funding (37%), followed by Eastern Europe and Central Asia (EECA, 20%), and East Asia and Pacific (EAP, 17%) (Figure 23). South Asia (SAS, 16%), which falls just behind EAP, is the region that has recorded the highest CAGR since 2014, at +43% (Figure 24). A more enabling investing environment in India following the Andhra Pradesh crisis has been a major driver of this trend, which is reflected in high volumes flowing into that
Figure 21 Investment Instruments – Swiss MIVs
Figure 22 Investment Instruments – Non-Swiss MIVs
Figure 20Investee Size – Swiss MIVs
0%
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20182017201620152014
94 94 95 96 95
7 6 5 4 5
EquityDebt
% of direct MFP
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78 74 75 76 75
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58 67 74 75 78
3531
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Investees with assets < USD 10mInvestees with assets between USD 10mand USD 100mInvestees with assets > USD 100m
% of MFP
27
country for microfinancing purposes. The share of investments in sub-Saharan Africa for Swiss MIVs has declined in relative terms, from 11% in 2014 to 8% in 2018. Annual growth remains positive, however, but is lower compared to non-Swiss MIVs (4% vs. 10% for the latter).
EECA is the only region that has recorded a flat or declining pattern in funding volumes since 2014, due to the macroeconomic downturn in Russia that has had a spillover effect on neighboring microfinance markets from 2015 onwards. Many central Asian countries have recovered, except for Azerbaijan, which remains a challenging environment for MIV investments. The EECA region overall witnessed a more favorable pattern in 2018.
D. Top country exposuresAs of December 2018, the top five countries attracting the highest volumes from Swiss MIVs are India, Cambodia, Georgia, Ecuador and Costa Rica (Figure 25). Compared to 2014, Honduras, Mexico, Panama, Sri Lanka, El Salvador, China and Indonesia have made it into the top 20. On the contrary, Azerbaijan, Tajikistan, Kyrgyzstan, Bolivia, Nigeria, Bosnia and Herzegovina and Tanzania left the top 20 ranking of Swiss MIVs. The first three countries were notably affected by the drop in oil prices in 2015, with spillover effects on the performance of domestic MFIs and a subsequent reduction of MIV funding.
Figure 23 Regional Diversification - Swiss MIVs
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20182017201620152014
33 31 35 37 37
3527 20 18 20
1315 14 17 17
612 15
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11 12 11 8 8
South AsiaEast Asia & Pacific
Middle East & North AfricaSub-Saharan Africa
Eastern Europe & Central AsiaLatin America & the Caribbean
23
% of direct MFP
Figure 24 CAGR of Regional Portfolio (2014-2018)
-11%
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MENASSASASEAPEECALAC
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Swiss MIVsNon-Swiss MIVs
Figure 22 Investment Instruments – Non-Swiss MIVs
28
Figure 25 Top 20 Country Exposure (2018)
MEXICO181
67%
PANAMA166
147%
HONDURAS181
88%
NICARAGUA83 23%
COSTA RICA296
18%
ECUADOR353
14%
COLOMBIA74 11%
EL SALVADOR116
62%
PARAGUAY81 –4%
PERU194
–4%
Top 20 country allocation
Countries of Swiss MIV investments
Swiss MIV investments at end 2018 (USD million)
CAGR of Swiss MIV investments between 2014–2018
29
INDIA532
36%
CAMBODIA419
12%
INDONESIA80 46%
CHINA107 50%
MONGOLIA138
5%
SRI LANKA141
52%
GEORGIA359
22%
KAZAKHSTAN118
11%
KENYA91 1%
ARMENIA163
6%
30
E. Risk concentration Interestingly enough, Swiss MIVs appear to have a less concentrated portfolio in terms of top region (Figure 26), top 5 countries (Figure 27) and top 5 investees (Figure 28).
Generally larger in size compared to their non-Swiss counterparts, Swiss MIVs are able to better diversify their microfinance portfolio, which enables them to mitigate risks more effectively.
Figure 26 Risk Concentration – Top Region
Figure 27 Risk Concentration – Top 5 Countries
Figure 28 Risk Concentration – Top 5 Investees
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Swiss MIVsNon-Swiss MIVs
% of direct MFP
31
3.3 MICROFINANCE DEBT PORTFOLIOThis section dives into the specific characteristics of Swiss MIV debt portfolios, highlighting their investment terms, investment currency strategies and risk patterns.
A. Debt investment size & tenorUntil end of 2016, Swiss MIVs had a lower debt exposure per financial institution than their global peers. This pattern has switched over the last two years, with Swiss MIVs presently showing an exposure of about USD 3 million outstanding per investee, compared to USD 2.6 million for the rest of the world (Figure 29 and Figure 30). These higher investments seem to be associated with the evolution in Swiss MIV investee profiles, which are generally larger in size (Figure 20). MIVs generally consider these financial institutions to be less risky counterparts. They will typically be able to absorb larger debt amounts attached with lower interest rates.
Looking at the remaining maturity of these debt investments shows that the trend line sits at around 24 months for non-Swiss MIVs and 20 months for Swiss MIVs on average since 2014. The recent drop observed in 2018 for Swiss MIVs is linked to the rhythm of microfinance transactions, which has slowed down given the low growth witnessed by the MIV market,
B. Local currency debt investments & hedging strategy Since 2014, Swiss MIVs have grown their share of local currency investments from 32 to 50% of the debt microfinance portfolio (Figure 31). An upward trend is also observable for non-Swiss MIVs, although at a slower pace.
Local currency investments are typically associated with lower repayment distress for end-borrowers, offering the latter more protection against foreign exchange shocks.
Also, from MIVs’ perspective, it appears that a material premium could be awarded to investors when a diversified basket of local currency investments remains unhedged.14 Such investment strategy has seen more traction in the MIV market in recent years, especially within Swiss MIVs, some of which go fully unhedged in terms of local currency investments. As illustrated, the Swiss MIV share of unhedged local currency investments has increased from 10% to 14% of their direct debt microfinance portfolio (Figure 32). This is a remarkable performance considering that non-Swiss MIVs have presented an inverse pattern, dropping from 22% to 10% over the same period.
14 Symbiotics, 2018, Going Unhedged in Frontier Markets.
Figure 30 Debt Size and Tenor – Non-Swiss MIVs
Figure 31 Share of Local Currency
Figure 29 Debt Size and Tenor – Swiss MIVs
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Average remaining maturity (right-axis)Average debt investment size (left-axis)
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Average remaining maturity (right-axis)Average debt investment size (left-axis)
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32 31 29 31
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3630 33 33 35
Swiss MIVsNon-Swiss MIVs
% of direct debt MFP
32
C. Yield on debt portfolioFocusing on yields in USD, Swiss MIVs have averaged 6.3% aligned with the type of institutions they invest in (Figure 20). Starting in 2016, yields slightly increased, generally linked to more local currency investments in countries offering attractive domestic rates in a stable currency environment (Figure 33). Non-Swiss MIVs registered a higher average yield of 7.3% as they invest in smaller institutions associated with higher risks.
When looking at another proxy for the interest rates charged by Swiss and Non-Swiss MIVs to their investees, USD transactions have averaged a slightly higher yield of 6.8% over the period, with a similar overall trend behavior over the period under review (see dashed line in Figure 33).15
Finally, yields for fully unhedged Swiss MIVs, a majority of which saw light between 2014 and 2018, are much higher than those for fully hedged funds, 10.3% on average but also witnessing higher volatility.
15 Symbiotics derived investment terms and data points from confidential information reported by its network of microfinance institutions. Source: Syminvest.com. Data extracted on 9 September 2019.
Figure 33 Portfolio Yields
Figure 32 Unhedged Local Currency Investments
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20182017201620152014
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Unhedged portion – Swiss MIVsUnhedged portion – Non-Swiss MIVs
% of direct debt MFP
0.0%
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20182017201620152014
Swiss fully unhedged MIVs
Non-Swiss hedged/partially hedged MIVsInvestment terms (Source: Syminvest Market Rates)
Swiss hedged/partially hedged MIVs
% of average debt MFP over two years
Note on methodologyPortfolio yields presented here are derived from self-reported data by MIV survey participants (a non-exhaustive list of Swiss MIVs) on their level of net income on their direct debt microfinance portfolio. These portfolio yields thus offer an approximate indication of the level of returns generated by MIVs on their debt portfolio, before incurring operational costs related to management and other operating fees. They also represent a proxy for the interest rates charged by MIVs to their investees, translated in USD terms for MIVs with a partially or fully hedged currency strategy. With more and more Swiss investment products opting for a fully unhedged currency approach, those specific MIVs yields from the Swiss sub-sample sit higher on the graph, translating rates in local currency (Figure 33).
33
D. Provisions & write-offs Every year since 2014, Swiss MIVs have had lower outstanding loan loss provisions (Figure 34) and yearly write offs (Figure 35) compared to their peers. Provisions outstanding have been rising since 2017, with the highest in 2018 for both Swiss and non-Swiss MIVs following challenging political and economic markets in a couple of countries, including Nicaragua and Nigeria. Write-offs remain low in comparison, signaling positive recovery rates for the MIV market in its entirety.
Figure 34 Outstanding Loan Loss Provisions at Year End
Figure 35 Yearly Write-offs
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20182017201620152014
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Swiss MIVsNon-Swiss MIVs
% of direct debt MFP
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0.24%
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0.60%
20182017201620152014
0.03
0.22
0.00
0.44
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0.27
0.01
0.54
0.16
0.34
Swiss MIVsNon-Swiss MIVs
% of direct debt MFP
34
3.4 INVESTOR TYPOLOGYInvestors in Swiss MIVs, either through fund shares or notes, are today primarily private institutional investors, mostly pension funds and banks (Figure 36). The share of this investor group has risen from 40% to 65% over the past five years, growing by 29% in absolute terms (Figure 37). High-net-worth individuals recorded the second largest growth in absolute terms, although from a lower volume basis. Contrary to what could have been expected in the past, the share of retail investors has decreased from 38% to 21% in relative terms (investments from this group have even decreased in absolute terms), whereas the share of public funders has also declined, from 18% to 11%.
In comparison, foreign microfinance asset managers have known much higher absolute growth in the retail segment (which now represents a similar share as for Swiss MIVs, at 19%) and benefit from greater support from public funders (at 22%, although this share has declined from 30% in 2014).
Figure 36 Investor Typology – Swiss MIVs
Figure 37 CAGR of Investor Types (2014–2018)
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20182017201620152014
38 32 3224 21
40 47 5162 65
4 3 5
18 18 13 11 11
High-net-worth individualsPublic fundersRetail investorsPrivate institutional investors
3 3
% of shares and notes
-8%
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8%
16%
24%
32%
High-net-worthindividuals
Publicfunders
Retailinvestors
Privateinstitutional
investors
-1.2
11.2 10.9
2.20.7
17.3
29.4
10.2
Swiss MIVsNon-Swiss MIVs
35
3.5 COSTS & RETURNSA. Cost structureSwiss MIV management fees have been stable at around 1.5% of total assets under management over the period, with other operating expenses at about 0.4%. Thanks to their relatively large fund size, they benefit from economies of scale and lower total expense ratios than their foreign microfinance peers, with similar management fees (1.6%) but higher operating costs (0.8%). On aggregate, the latter have a higher total expense ratio (2.4% versus 1.9% for their Swiss peers, Figure 38).
B. Net returnsSwiss MIV returns in USD have averaged 3% since 2014 compared to slightly lower returns in EUR, at 2.4%. Returns were volatile throughout the period. For instance, in 2015 and 2016, markets worried about continuous pressure in Russia, the Caucasus and Central Asia – a prime microfinance region – due to the effects of currency devaluation and low oil prices. While most financial institutions have shown resiliency in light of the adverse economic conditions, this conjuncture negatively impacted institutions in Azerbaijan, Tajikistan and Kazakhstan, which is reflected in the net returns of private debt funds in both currencies, USD and EUR (Figure 39). Africa and Latin America also suffered during this period, with major exporters such as Nigeria, Bolivia, Colombia and Peru experiencing decreasing commodity prices. The next two years (2017–2018) witnessed a stabilization of MFI operations across the main investment regions, as reflected in the much higher performance of Swiss MIV net returns in USD (4.1% and 4.2%) compared to their global peers (2.2% and 3.3%). Only EUR share classes registered negative returns in 2017 (–0.9%), hampered by high hedging costs but improving the year after (2.8%).
Figure 38 Total Expense Ratio
0.0%
0.6%
1.2%
1.8%
2.4%
3.0%
20182017201620152014
2.0
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2.4
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2.3
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Swiss MIVsNon-Swiss MIVs
% of average assets over two years
Figure 39 Net Returns (Private Debt Funds)
-1.5%
0.0%
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3.0%
4.5%
6.0%
20182017201620152014
Swiss private debt funds – EUR
Swiss private debt funds – USDGlobal MIV market – USD
Global MIV market – EUR
% of share price
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3.6 SOCIAL PERFORMANCE & SDGsIn line with their growing portfolio, the average number of Swiss MIV borrowers has significantly increased over the last years. An average Swiss MIV today indirectly finances about 540,000 borrowers (Figure 40).
Borrowers’ average credit with the MFI remains low, at less than USD 1,800 (Figure 40), showing the commitment of Swiss MIVs (as well as that of their partner MFIs) to serving the low-income segment of the population.
The MFIs financed by Swiss MIVs have on average a more woman-oriented clientele, representing about 75% of total borrowers, a share that is higher than foreign asset manager MIVs (67%) (Figure 41). Similarly, rural borrowers represent about 65% of the clientele of MFIs financed by Swiss MIVs, whereas their share amounts at 54% for non-Swiss MIVs.
Through the years, Swiss MIVs have increased their exposure to financial institutions with a more diversified clientele, notably SMEs, although keeping a focus on the micro-segment. As a result, from the perspective of Swiss MIV investees, microenterprise loan volumes have decreased to 43% (Figure 42), although this share remains much higher when looking at number of clients.
Figure 40 Breadth and Depth of Outreach – Swiss MIVs
Figure 41 Borrowers’ Gender and Location
Figure 42 Investees’ Loan Portfolio
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Rural borrowers: Swiss MIVsRural borrowers: Non-Swiss MIVsFemale borrowers: Swiss MIVsFemale borrowers: Non-Swiss MIVs
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Microenterprise loans: Non-Swiss MIVsMicroenterprise loans: Swiss MIVsImmediate household needs loans: Non-Swiss MIVsImmediate household needs loans: Swiss MIVs
% of GLP
37
In addition to credit-only products, more than 50% of MFIs in Swiss MIV portfolios also offer savings, insurance, other financial products and non-financial products. This ratio is generally higher in comparison to their non-Swiss counterparts, illustrating a more sophisticated, if not a more inclusive product range for investees from Swiss MIVs (Figure 43).
Last but not least, the most recurring SDGs against which MIVs map their investment portfolios are, among others: Goal 1: End poverty in all its forms everywhere; Goal 8: Promote inclusive and sustainable economic growth, employment and decent work for all; Goal 5: Achieve gender equality and empower all women and girls; and Goal 10: Reduce inequality within and among countries (Figure 44).
Figure 43 MFI Non-Credit Products (2018)
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% of investees in the MIV portfolio
Figure 44 Mapping of Social Goals against the SDGs
100%
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94%
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Promote sustained, inclusive and sustainable economic growth,full and productive employment and decent work for all
End poverty in all its forms everywhere
Achieve gender equality and empower all women and girls
Reduce inequality within and among countries
Ensure inclusive and equitable quality educationand promote lifelong learning
Strengthen the means of implementationand revitalize the global partnership for sustainable development
Ensure access to affordable, reliable, sustainableand modern energy for all
End hunger, achieve food security and improved nutritionand promote sustainable agriculture
Ensure healthy lives and promote well-being for all at all ages
Build resilient infrastructure, promote inclusiveand sustainable industrialization and foster innovation
Ensure availability and sustainable management of waterand sanitation for all
Make cities and human settlements inclusive, safe,resilient and sustainable
% of Swiss MIVs
38
4. O U T LO O K
With one of the longest track records in microfinance and impact investing, Swiss specialized impact investment fund managers play a leading role in private sector development finance by managing and advising one third (32%) of global fund managers’ capital, with volumes that have quadrupled since 2010, from USD 2.4 billion to USD 9.3 billion.
Thus, Swiss fund managers constitute a major contributor to the SDGs. They channel their impact investments in emerging markets through financial intermediaries or directly in projects or corporations. They have launched a multitude of impact investment products targeting sectors such as microfinance, SMEs, energy and climate, food and agriculture, as well as health and education.
Overall, they will continue to diversify their investment approach in terms of:
› Impact themes: Fund managers are increasing investment volumes in current themes and expanding to new horizons, such as community development, forestry and water;
› Investment instruments: Following market developments in some regions, such as Latin America, traditional senior debt lenders are increasingly inclined to diversify their financial instruments with riskier products, such as subordinated debt;
› Partnerships: Some current fund managers are initiating new blended finance structures in partnership with international development institutions;
› Structuring: Microfinance collateralized loan obligations that saw light 10 years ago, are witnessing a renewed push through improved structuring features, most recently by a leading Swiss fund manager.
Under the new paradigm shift in the global economy, developed countries are facing declining populations, flat growth perspectives and negative interest rates.16 There is a massive opportunity for capital savings to flow out of these saturated markets, into highly underserved and growing economies. Impact investing products offer unique means for private sector development finance investors to play a crucial role in bridging the SDG financing gap, currently estimated at USD 2.5 trillion per year.
16 Symbiotics, 2017, Why Microfinance Matters to Investors.
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5.A P P E N D I C E S
ACRONYMSAM asset manager AUM assets under management CAGR compound annual growth rate CDO collateralized debt obligation EAP East Asia & Pacific EECA Eastern Europe & Central Asia ESG environmental, social and governance EUR Euro GIIN Global Impact Investing Network GLP gross loan portfolio IPO initial public offering LAC Latin America & the Caribbean MFIs microfinance institutions MFP microfinance portfolio MIVs microfinance investment vehicles MSMEs micro, small and medium-sized enterprises NGO non-governmental organization SAS South Asia SDC Swiss Agency for Development and Cooperation SDGs Sustainable Development Goals SIFEM Swiss Investment Fund for Emerging Markets SMEs small and medium enterprises SSA sub-Saharan Africa USD United States dollar
INDEX OF FIGURESFigure Page 1 Investment Value Chain 8 2 Investment Approach and Methodology 9 3 Investment Universe 10 4 SDG Mapping of Investment Strategies 14 5 Impact Investing Market Size 16 6 Swiss Impact Investing Growth 16 7 2018 Asset Allocation by Sector – Emerging Market-Focused
Global Investors 198 Swiss Impact Investment Products by Sector 19 9 Swiss Impact Investment Products by Asset Class 20 10 Swiss Impact Investment Products by Size 20 11 Swiss Impact Investment Products by Investee Profile 21
40
12 Swiss Impact Investment Products by Incorporation Place 21 13 Swiss Impact Investment Products by Inception
and Closing Year 2214 Swiss Impact Investment Products by Type 22 15 Microfinance AUM 23 16 Yearly Growth of MIV Market 23 17 Top 3 Swiss MIV Managers 24 18 MIV Asset Structure 25 19 MIVs’ Other Portfolio 25 20 Investee Size – Swiss MIVs 26 21 Investment Instruments – Swiss MIVs 26 22 Investment Instruments – Non-Swiss MIVs 26 23 Regional Diversification – Swiss MIVs 27 24 CAGR of Regional Portfolio (2014–2018) 27 25 Top 20 Country Exposure (2018) 28 26 Risk Concentration – Top Region 30 27 Risk Concentration – Top 5 Countries 30 28 Risk Concentration – Top 5 Investees 30 29 Debt Size and Tenor – Swiss MIVs 31 30 Debt Size and Tenor – Non-Swiss MIVs 31 31 Share of Local Currency 31 32 Unhedged Local Currency Investments 32 33 Portfolio Yields 32 34 Outstanding Loan Loss Provisions at Year End 33 35 Yearly Write-offs 33 36 Investor Typology – Swiss MIVs 34 37 CAGR of Investor Types (2014–2018) 34 38 Total Expense Ratio 35 39 Net Returns (Private Debt Funds) 35 40 Breadth and Depth of Outreach – Swiss MIVs 36 41 Borrowers’ Gender and Location 36 42 Investees’ Loan Portfolio 36 43 MFI Non-Credit Products (2018) 37 44 Mapping of Social Goals against the SDGs 37
INDEX OF TABLESTable Page 1 Swiss Impact Investment Products 5 2 Global Impact AUM in Emerging Markets 15 3 Descriptive Profiles of Swiss Specialized Impact
Investment Fund Managers 18
A B O U T S Y M B I OT I C SSymbiotics is the leading market access platform for impact investing. Over the past decade, the company has originated and structured nearly 4,000 investment transactions, worth more than USD 5.3 billion, on behalf of 450 companies in 83 emerging and frontier markets, all serving a measurable sustainable and inclusive finance objective, purchased by 50 different investment funds and institutional investors. Symbiotics is a registered asset manager in Switzerland, a registered investment adviser in the United Kingdom, and has further office presence in Mexico, the Netherlands, Singapore, South Africa and the United States, regrouping more than 150 employees worldwide.
A B O U T T H E S TAT E S E C R E TA R I AT F O R E C O N O M I C A F F A I R S S E C OCentre of expertise for economic developmentThe Economic Cooperation and Development division is part of SECO’s economic competence. We use this expertise specifically for international cooperation, benefiting from direct access to leading economic organisations, government offices and central banks. We focus on advanced developing and transition countries facing specific challenges in regard to development policy. Our programmes are aligned with national and international development strategies. We systematically apply quality assurance, risk monitoring and results driven management as part of our programmes. This is how we make sure that our measures actually have an impact. We obtained ISO 9001 certification in 2001.
Since 2007 we have also contributed to efforts to reduce social and economic disparities in the enlarged EU. This contribution falls under Switzerland’s European policy and is not part of development cooperation.
Reducing poverty through sustainable growth
Our mission is to help achieve sustainable economic growth that reaches all segments of the population in our partner countries, using a range of economic and trade policy measures. In doing so, we aim to reduce poverty and the impact of global risks. Growth should address economic as well as social and environmental aspects, without compromising the well-being of future generations. It enables the private sector to create more jobs and the government to deliver central public services.
To achieve our objective, we have defined four target outcomes:› Effective institutions and services › More and better jobs› Trade and competitiveness › Climate-friendly growth
These form our contribution to implementing the United Nations’ 2030 Agenda and its 17 goals for sustainable development. We systematically take into account the cross-cutting themes of good governance and gender equality in all areas of our work.
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